Offering defaulters a way out

Offering defaulters a way out


Distressed mortgage buyers play a role in easing the US out of its worst housing slump since the 1930s, writes BOB IVRY


THE way out of the worst US housing slump since the 1930s goes through Angel Gutierrez.


Mr Gutierrez buys bad mortgages a dozen at a time for a fraction of their face value from lenders overwhelmed by the highest number of defaults in 23 years.


When he goes door to door to negotiate lower payments for homeowners or pay them to move so he can sell their houses, he’s speeding up the recovery. He’s establishing a price for the homes and flushing out the least reliable borrowers.


‘You buy the mortgage for pennies on the dollar, carry the big stick, tell the homeowner how it’s going to be, then double your money very easily,’ Mr Gutierrez said.


On a sunny day last month, Mr Gutierrez knocked on doors in Imperial Beach, an arid, hilly town of about 26,000 just south of San Diego. There were three Imperial Beach houses on the spreadsheet provided by the mortgage servicer that was selling them; none of the borrowers had made a payment in months.


In Imperial Beach, 15 homeowners lost their properties to foreclosure in the first three months of 2008, compared with four in the same period last year, according to DataQuick.


Mr Gutierrez said that because of the legal fees, he avoids foreclosing except when he has to ‘clean’ the title of liens or other legal judgments.


At a one-storey, L-shaped stucco house with rose bushes and an American flag hanging from the garage, 62-year-old Armida Leos answered the door. Her 73-year-old husband, Gilberto, a former US Border Patrol officer, had to quit retirement and get a job as a security guard when their monthly mortgage payments jumped to US$3,200 from US$2,400, she said.


Mr Gutierrez’s spreadsheet said that the Leos family owed US$455,000 on their mortgage. They had just received notice from San Diego County that their property tax was being reduced because the house had been assessed for US$193,000.


Back in his pickup truck, Mr Gutierrez said that he was prepared to offer Mrs Leos and her husband US$5,000 to move out.


Mr Gutierrez and his wife Brenda, based in San Diego, are a two-person shop in an industry that is attracting deep-pocketed investors such as New York-based BlackRock Inc, which manages US$1.36 trillion in assets and plans to raise US$2 billion to invest in discount mortgages. Other Wall Street giants like New York-based Goldman Sachs Group Inc and Morgan Stanley are also getting into the business by bidding on thousands of mortgages at a time.


‘At this stage of the game, they’re playing a very small role but I expect that that role will accelerate as more people are willing to accept reality,’ said Sam Zell, the billionaire real estate investor who’s called ‘the grave dancer’ for buying distressed assets. ‘The single-family market has to be cleared. No market works unless it clears. If banks can’t clear, they can’t make new loans. Anything you do to keep people who can’t afford it in their houses is another way of delaying the market clearing.’


In San Diego’s Encanto neighbourhood, median home prices slid 38 per cent in March from a year earlier, according to La Jolla, California-based DataQuick Information Systems Inc. Mr Gutierrez pulled up in front of an L-shaped, one-storey stucco house. The grass was tall enough to hide a broken child’s swing in the front yard.


Mr Gutierrez, who was eyeballing the property to see if he wanted to bid on the mortgage, checked the gas meter mounted on the garage. It was spinning, a sign that the home was probably occupied.


The homeowner was US$365,000 under water after buying the house with no money down in June 2005, according to a spreadsheet listing about 30 loans for sale by a national mortgage servicer that Mr Gutierrez referred to in his truck. If Mr Gutierrez bought the note for 20 cents on the dollar, or US$73,000, he could probably get the owner to leave by giving her US$5,000 for moving expenses, then sell the home for about US$150,000, well below even the neighbourhood’s declining market value, he said. That would leave him a profit of about US$70,000. ‘I like the fast nickel,’ he said. ‘You buy them cheap, you sell them fast, and you get paid.’


When there was no answer at the front door, Mr Gutierrez slipped a bright orange sheet of paper into the jamb. It gave the homeowner Mr Gutierrez’s phone number to call if he was interested in selling.


‘That’s so I can feel them out, see what they’re thinking,’ Mr Gutierrez said. He has no shortage of defaulting borrowers nearby. One in every 74 homes, or 15,315, in the San Diego area was in the foreclosure process in the first three months of 2008, compared with one in every 194 homes nationally, according to RealtyTrac Inc, an Irvine, California-based real estate data provider.


Mr Gutierrez said that smaller operators like him are getting ‘knocked out of the game’ because of the volume of mortgages that banks want to dump.


‘The banks want to get rid of the loans, and they want to get rid of them to one company, not 20 or 30 companies,’ Mr Gutierrez said. ‘It makes sense. I would do the same thing.’


BlackRock, the biggest publicly traded US asset manager, announced in March that it was backing a new company called Private National Mortgage Acceptance Co LLC, also known as PennyMac, that will buy mortgages at a discount and renegotiate borrowing terms with homeowners. The Calabasas, California-based company will then service the loans, meaning that it will collect monthly payments.


Mr Gutierrez said that he’ll probably offer the homeowner with the kid’s swing in the front yard enough cash to pay for a mover and a couple of months in a rented apartment because, he said, many of them want to get out but don’t have the money.


‘I’m considered a bottom feeder,’ Mr Gutierrez said. ‘That’s the way bankers see me. They only want the best loans, the loans that are paying. That’s nice, but there’s no money in it.’ – Bloomberg


Source: Business Times

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